Midyear Outlook Implementation Guide

Summary

The global expansion is chugging along, with an improved eurozone outlook in particular; deflation fears and near-term political risks look to have faded; and financial market volatility is subdued. This may provide a fertile ground for further modest gains in risk assets such as equities.

Market views

We prefer equities over fixed income, and credit over government bonds. In equities we generally prefer European, Japanese and emerging market (EM) stocks over their more expensive U.S. counterparts. We see room for the momentum style factor — including technology shares — to outperform further, albeit with potential for swift reversals. We also like selected value shares and financials. In fixed income, we like higher-quality credit and generally prefer inflation-linked bonds over nominal ones. We also see potential opportunities in selected EM debt and income assets.

Key themes

1

Sustained expansion: The current U.S. economic cycle has been unusually long, sparking market fears that it is ready to die of old age. We have a different take, and believe the U.S. expansion’s remaining lifespan can be measured in years, not quarters.

2

Rethinking risk: Financial market volatility has been low, but that does not necessarily mean markets are complacent. We see the probability of a volatility regime shift as low – as long as the economy remains stable and systemic financial vulnerabilities are kept in check. Result: Many investors may be under-risked.

3

Rethinking returns: Structurally lower growth and interest rates force a rethink of asset valuations. Historically low government bond yields could be here to stay, and although worrying about equity valuations -- particularly in the U.S. -- has become a favorite pastime, we believe equities may be cheaper than they look in a low-rate world.

Flows: A European tale

We believe analysis of exchange-traded product (ETP) flows can provide insights into how investors might be positioned for the quarter ahead. The central narrative of the first half of 2017 was focused on flows into European equity ETPs with more than $28 billion invested in European equity ETPs this year.*

European equity buying does not appear to have been funded by selling down U.S. equity positions, however. Globally, more than $86 billion has flowed into U.S. equity ETPs in 2017. At the same point last year, $11.6 billion had flowed into the same exposures globally. More likely is the European equity flows this year are evidence of the $34 billion 2016 European equity ETP global outflow returning – assets which may have been sitting in cash. Initially, it was European-based investors doing most of the buying, but as political risks rolled off – particularly the French election – many U.S. investors started buying the region and overtook Europeans in terms of percentage of inflows.

We believe there is room for further flows into European equity ETPs. A portion of the 2016 outflow has still yet to return and Q2 European earnings were strong (relative to the U.S.). Globally, European equity ETP assets under management (AUM) has increased by 26% since the end of June 2016. Total global ETP AUM has increased by 30% over the same period.

Significant equity flows this year ($97 billion versus $24 billion in the first half of 2016) do not appear to have come at the expense of fixed income. More than $87 billion has flowed into fixed income ETPs globally so far this year, with investors appearing to take a positive view on U.S. investment grade credit exposures – which account for a third of the total global fixed income inflow – in particular.

2. Rethinking risk: We do not see low market volatility as a warning sign in itself, but more a normal feature of the benign economic backdrop. Investors may be under-risked. As always, diversification is important.

2. Rethinking risk: We do not see low market volatility as a warning sign in itself, but more a normal feature of the benign economic backdrop. Investors may be under-risked. As always, diversification is important.

Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal.

This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular. The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision. This document contains general information only and does not take into account an individual's financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries.

Diversification and asset allocation may not protect against market risk or loss of principal. Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and than the general securities market.

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TIPS can provide investors a hedge against inflation, as the inflation adjustment feature helps preserve the purchasing power of the investment. Because of this inflation adjustment feature, inflation protected bonds typically have lower yields than conventional fixed rate bonds and will likely decline in price during periods of deflation, which could result in losses. Government backing applies only to government issued securities, and does not apply to the funds.

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